Whatever type of business you run – a limited company, a partnership or a sole trader operation it is likely that the value of the business will be brought into the financial reckoning when you divorce. The interest you have in the enterprise is an asset just like a house, shares or savings in the bank. You are therefore required to provide full details of your ownership on Form E as part of the financial disclosure process during your divorce. And even if you and your spouse avoid going to court – for example you reach agreement through mediation – it is always important for both sides to make full disclosure of their financial assets to each other so that any agreement cannot be challenged in years to come.
Here we look at:
- How the business might be valued
- Some of the ways courts might deal with your business interests
How Do Courts Value A Business For Divorce?
Placing a value on a business is no easy task – at any time. When the business is being valued for divorce purposes it can be even trickier. Consider for example if the business is a family-owned concern. Both spouses might play an active role in day-to-day operations. In these circumstances any valuation will have to take account of the impact of one spouse perhaps becoming less involved or walking away from the business altogether.
In most cases we will ask a specialist accountant to prepare a valuation report for the court (or for use by each side’s advisers if the court isn’t involved). To keep costs down the parties are strongly encouraged to appoint a single joint expert (SJE) to prepare an independent report. In fact, the courts will usually insist on a SJE.
When valuing the business the sort of factors the SJE will consider include:
- The business assets and liabilities, including the value of any company pension fund
- Cash flow
- Market value of the business
- Future profit and loss
- How the business structure affects value. Are there restrictions on transferring shares in a limited company for example?
- Tax implications of any family court order affecting the business
- The effect of any change of ownership following divorce
What Happens If The Value Of The Business Changes?
Valuation of a business for divorce purposes can be further complicated if there is a significant change in the fortunes of the business after the parties have separated but before the financial order has been finalised. And given the length of time it can take to finalise the financial aspects of divorce, such a scenario is not that uncommon. In the 2023 case of GA v EL the relevant business provided bespoke technology for call centre firms. As part of divorce proceedings it was valued by the SJE at £28.1 million. That was in 2019. In fact when the business came to be sold in 2021 it fetched £70million.
The husband argued that the increase in value was due to his personal endeavours after the marriage had ended and the wife should not benefit. The court took a different, broader view. While it accepted that the husband had contributed to the increase in value, the increase was also attributable to other factors such as favourable market conditions and passive growth. In addition the wife had continued to take on a large share of the parenting responsibilities enabling the husband to concentrate on selling the business. In the event the wife was credited with a sum that reflected a considerable proportion of the increase in the business value.
Dealing With Business Assets On Divorce: Possible Orders
Some of the ways a business can be treated either in a negotiated or mediated settlement or by court order include:
- An outright sale of the business and division of the proceeds
- In the case of a jointly owned business one spouse buying the other spouse out
- In a limited company transfer of shares from one spouse to the other. Although here care needs to be taken to ensure any existing shareholder agreement that provides for share transfer on divorce is observed
- Awarding of a lump sum to one spouse in return for them giving up any claim to the business If a lump sum can’t be raised immediately, provision may be made for periodical payments
Ultimately the courts will be reluctant to do anything that jeopardises a viable business – one that is perhaps providing employment and a useful service. But judges have a duty to achieve fairness in the financial settlement and – in appropriate cases – have the power to make orders that will significantly affect the company. In our experience the best outcome is very often passing the business to one spouse and compensating the other by giving him or her a larger share of the remaining matrimonial assets.
Contact Us
For advice on any of the issues we have raised please call us on 01492 860420 or contact the team online. Gamlins Solicitors LLP has a network of offices across North Wales, and we can arrange an in-person appointment at the office that is most convenient for you or a remote appointment if you prefer.
